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the most important determinant of consumer spending is

the level of income

the MPC can be defined as that fraction of a

change in income that is spent

a decline in disposable income

decreases consumption by moving downward along a specific consumption schedule

the consumption schedule is such that

the MPC is constant and the APC declines as income rises

the size of the MPC is assumed to be

greater than zero, but less than one

as disposable income increases, consumption

and saving both increase

what will cause a movement down along an economy's consumption schedule?

a decrease in disposable income

dissaving occurs where

consumption exceeds income.

if the marginal propensity to consume is .9, than the marginal propensity to save must be


if the saving schedule is a straight line, the

MPS must be constant

the relationship between the real interest rate and investment is shown by the

investment demand schedule

the immediate determinants of investment spending are the

expected rate of return on capital goods and the real interest rate

the real interest rate is

the percentage increase in purchasing power that the lender receives on a loan

a high rate of inflation is likely to cause a

high nominal interest rate

the multiplier is useful in determining the

change in GDP resulting from a change in spending

the multiplier is defined as

change in GDP/initail change in spending

the multiplier

can be found by taking the reciprocal of the mps

the practical significance of the multiplier is that it

magnifies initial changes in spending into larger changes in GDP

in which industry or sector of the economy will business cycle fluctuations likely have the greatest effect on output

capital goods

the phase of the business cycle in which real GDP declines is called

a recession

the phase of the business cycle in which real GDP is at a minimum is called

the trough

the production of durable goods varies more than the production of nondurable goods because

durable purchases can wait

the United States economy is considered to be at full employment when

about 4-5 percent of the labor force is unemployed

to be officially unemployed a person must

be in the labor force

the labor force includes

employed workers and persons who are offically unemployed

structural unemployment

may involve a locational mismatch between unemployed workers and job openings

which of the following consititue the types of unemployment ocurring at the natural rate of unemployment

structural and frictional unemployment

the GDP gap measures the difference between

actual GDP and potential GDP

A large negative GDP gap implies

a high rate of unemployment

Inflation means that

prices in the aggregate are rising, although some particular prices may be falling

demand-pull inflation

occurs when total spending exceeds the economys ability to provide output at the existing price level

cost-push inflation may be caused by

a negative supply shock

rising per-unit production costs are most directly associated with

cost-push inflation

real income is found by

dividing nominal income by the price index

cost-of-living adjustment clauses

tie wage increases to changes in the price level

inflation is undesirable because it

arbitrarily redistributes real income and wealth

A nations gross domestic product

is the dollar value of all final output produced within the borders of the nation

GDP is the

monetary value of all final goods and services produced with the borders of a nation in a particular year

by summing the dollar value of all market transactions in the economy we would

obtain a sum substantially larger than the GDP

final goods and services refer to

goods and services purchased by ultimate users, rather than for resale or further processing

If depreciation (consumption of fixed capital) exceeds domestic investment, we can conclude that

net investment is negative

suppose that inventories were $400 billion in 2007 and $50 billion in 2008. In 2008 accountants would

add $10 billion to other elements of investment in calculating total investment

in calculating GDP, governmental tranfer payments, such as social security or unemployment compensation, are

not counted

the largest component of total expenditures in the United States is


Government purchases include government spending on

government consumption goods and public capital goods

what best defines disposable income

income received by households less personal taxes

real GDP refers to

GDP data that has been adjusted for changes in the price level

The aggregate demand curve

shows the amount of real output that will be purchased at each possible price level

the interest-rate effect suggest that

an increase in the price level will increase the demand for moneny, increase interest rates, and decrease consumption and investment spending

the real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending

if the price level increase in the united states relative to foreign countries, then american consumers will purchase foreign goods and fewer U.S. goods is

the foreign purchases effect

the factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the

determinants of aggregate demand

a decline in invest will shift the AD curve to the

left by a multiple of the change in investment

if investment increases by $10 billion and the economys MPC is .8, the aggegate demand curve will shift

rightward by $50 billion at each price level

which of the following would most likely shift the aggregate demand curve to the right

An increase in stock prices that increases consumer wealth

in an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. we would expect this to

increase aggregate demand

what percentage of the average firm's cost are accounted for by wage and salaries


the aggregate supply curve

show s the various amounts of real output that businesses will produce at each price level

the aggregate supply curve is upsloping because

per-unit production cost rise as the economy moves toward and beyond its full-employment real output

productivity measures

real output per unit of input

per-unit production cost is

total input cost dived by units of output

other things equal, a reduction in personal and business taxes can be expected to

increase both aggregate demand and aggregate supply

efficiency wages are

above-market-wages that bring forth so much added work effort that per-unit production cost are lower than at market wages

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